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go monthly instalments , or EMIs, have again become the talking point for many home loan customers.
The impact has been telling on many household's finances, which are already under strain due to the rising living expenses . While higher EMIs are a cause for consternation for borrowers, there could be relief in the form of certain clauses in the home loan contract.
Without understanding the clauses, you could fall victim to some general misconceptions about loans and shut out ways to lighten the EMI burden. Here are five myths regarding home loans that you need to be aware of:
MYTH 1: HIKE IN INTEREST RATE MEANS INFLATED EMIS
The immediate reaction of many borrowers to an upward revision in a bank's base rate - and as a result the home loan rate - is that it will push up their EMIs, wreaking havoc on their monthly finances.
This, perhaps, is the biggest myth of all, especially when the rates are hardening. In fact, most banks, subject to conditions, usually extend the tenure of the loan and keep the EMI amount unchanged.
"Over an interest rate cycle, the tenure could go up and down, in line with the changes in the applicable interest rate," says Suvrat Saigal, consumer banking director, Barclays Corporate India.
"However, the decision depends upon factors like the age of the borrower and the property, his/her income and so on."
By default it's the tenure that is extended and the EMI amount sees no impact. Therefore, if you do not wish to prolong your loan repayment, you need to inform the bank about your willingness to service a higher EMI.
Remember, you are not helping your finances by extending the tenure.
"You actually pay a lot more in interest," suggests Vipul Patel, Home Loan Advisors. "It is generally recommended that you should try and part prepay, refinance or increase the EMI amount to ensure that the loan tenor can be reduced. Loan extension should be considered only in exceptional circumstances," he says.
MYTH 2: PRE-PAYMENT ALWAYS ATTRACTS A PENALTY
Not always. "Typically, it is levied during the initial 3-5 years of the loan. The charge levied declines over time," says Saigal of Barclays India. "The nature, of course, varies as per the bank or the financial institution. Some banks may choose to charge it, some may not."
If you choose to repay the loan out of your own funds, you will have little to lose. As long as you have not opted for a home loan refinance from another lender, most financial institutions waive the prepayment penalty. "Most institutions allow up to 25% of the outstanding loan amount to be part prepaid in a financial year, but will charge anything from 2% to 4% for any amounts paid over the specified limit of 25%," says Patel.
Source : ET
